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Section 1: 8-K (8-K)

Document





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 23, 2018

 
 
 
 
 
MB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
 
 
Maryland
 
001-36599
 
36-4460265
(State or other jurisdiction of incorporation)
 
(Commission File No.)
 
(IRS Employer Identification No.)
 
 
 
 
 
 
 
 
 
 
800 West Madison Street, Chicago, Illinois 60607
(Address of principal executive offices) (Zip Code)
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code:  (888) 422-6562
 
 
 
 
 
 
 
 
 
 
N/A
(Former name or former address, if changed since last report)
 
 
 
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[   ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[   ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[   ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[   ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [   ] 









Item 2.02 Results of Operations and Financial Condition

On October 23, 2018, MB Financial, Inc. issued a release containing its third quarter 2018 results of operations.   A copy of the release, including unaudited financial information contained therein, is attached as Exhibit 99.1 to this Current Report on Form 8-K and incorporated by reference herein.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits
Exhibit 99.1 Release of MB Financial, Inc.

 









SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
 
MB FINANCIAL, INC.
 
 
 
 
 
 
Date:
October 22, 2018
By:
/s/Randall T. Conte
 
 
 
 
Randall T. Conte
 
 
 
 
Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 








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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit



EXHIBIT 99.1
                                    
395436027_mbfilogoblacka09.jpg
3Q18



MB FINANCIAL, INC. REPORTS THIRD QUARTER 2018 NET INCOME


CHICAGO, October 23, 2018 – MB Financial, Inc. (NASDAQ: MBFI), the holding company for MB Financial Bank, N.A., today announced third quarter 2018 net income of $42.7 million compared to $38.5 million last quarter and $60.8 million in the third quarter a year ago.  Diluted earnings per common share were $0.47 in the third quarter of 2018 compared to $0.42 last quarter and $0.69 in the third quarter a year ago.   

Operating Earnings (in thousands, except per share data)

The table below reconciles net income, as reported, to operating earnings excluding our Mortgage Banking Segment. As previously announced, we have discontinued our national mortgage origination business (substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area). Therefore, we believe operating earnings excluding our Mortgage Banking Segment better reflect our primary operations until the wind down of the segment is complete, as we are retaining the mortgage servicing asset, residential mortgage loans on our balance sheet, and Chicagoland area originations.
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Net income - as reported
 
$
42,714

 
$
38,533

 
$
56,757

 
$
144,194

 
$
60,843

 
 
$
138,004

 
$
159,846

Non-core items, net of tax (1)
 
12,889

 
18,679

 
614

 
(96,814
)
 
1,942

 
 
32,182

 
3,876

Operating earnings
 
55,603

 
57,212

 
57,371

 
47,380

 
62,785

 
 
170,186

 
163,722

Operating earnings (loss) - Mortgage Banking Segment
 
1,067

 
(3,359
)
 
(295
)
 
(815
)
 
2,217

 
 
(2,587
)
 
6,309

Operating earnings, excluding Mortgage Banking Segment
 
54,536

 
60,571

 
57,666

 
48,195

 
60,568

 
 
172,773

 
157,413

Dividends on preferred shares
 
3,000

 
3,000

 
3,100

 
2,000

 
2,002

 
 
9,100

 
6,007

Operating earnings available to common stockholders, excluding Mortgage Banking Segment
 
$
51,536

 
$
57,571

 
$
54,566

 
$
46,195

 
$
58,566

 
 
$
163,673

 
$
151,406

Diluted earnings per common share - as reported (2) (3)
 
$
0.47

 
$
0.42

 
$
0.81

 
$
1.67

 
$
0.69

 
 
$
1.69

 
$
1.81

Diluted operating earnings per common share, excluding Mortgage Banking Segment
 
$
0.60

 
$
0.68

 
$
0.64

 
$
0.54

 
$
0.69

 
 
$
1.92

 
$
1.79


(1) 
Non-core items represent the difference between non-core non-interest income and non-core non-interest expense net of tax as well as other non-core tax items. See "Non-GAAP Financial Information" section for details on non-core items starting on page 25. Non-core items for the third quarter of 2018 include approximately $7 million, net of tax, related to the discontinuation of our national mortgage origination business and approximately $3 million, net of tax, related to the pending merger with Fifth Third Bancorp ("Fifth Third"). Non-core items for the second quarter of 2018 include approximately $14 million, net of tax, related to the discontinuation of our national mortgage origination business and approximately $5 million, net of tax, related to the pending merger with Fifth Third.

(2) 
The $0.81 diluted earnings per common share in the first quarter of 2018 were positively impacted by a $15.3 million, or $0.18 per common share, return from preferred stockholders due to the redemption of our 8% Series A non-cumulative perpetual preferred stock. The $15.3 million represents the excess carrying amount over the redemption price of the Series A preferred stock.

(3) 
The $1.67 diluted earnings per common share in the fourth quarter of 2017 were positively impacted by a $104.2 million, or $1.23 per common share, tax benefit due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJ Act").





Key Items (compared to 2Q18)
Pending Merger
On May 20, 2018, we signed a definitive merger agreement with Fifth Third. We received the necessary stockholder approvals on September 18, 2018. The merger remains subject to regulatory approvals and other customary closing conditions.
Operating Earnings
Operating earnings, excluding the Mortgage Banking Segment, decreased $6.0 million, or 10.0%, to $54.5 million compared to the prior quarter. This decrease resulted from a $11.2 million (net of tax) increase in provision for credit losses (due to one loan relationship) partly offset by a $3.8 million (net of tax) increase in net interest income and a $2.5 million (net of tax) decrease in professional and legal fees.
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $0.60 compared to $0.68 in the prior quarter.
Loans
Loan balances, excluding purchased credit-impaired loans, increased $124.6 million (+0.9%, or +3.6%, annualized) from prior quarter end due to growth in commercial loans and a $75.5 million transfer from loans held for sale.
Average loan balances, excluding purchased credit-impaired loans, decreased $6.4 million (-0.1%, or -0.2% annualized) to $13.7 billion.
Average yield on loans, excluding accretion on loans acquired in bank mergers, increased 18 basis points to 4.68% from 4.50% in the prior quarter as a result of increases in short-term interest rates.
Deposits
Low-cost deposits decreased $136.6 million (-1.1%, or -4.3% annualized) from prior quarter end to $12.3 billion due to a decrease in non-interest bearing deposits (temporary decrease) partly offset by an increase in money market and NOW deposits.
Average low-cost deposits increased $131.2 million (+1.0%, or +4.2% annualized) to $12.6 billion due to an increase in money market deposits.
Average cost of total deposits increased seven basis points to 0.54%.
Net interest margin
Net interest margin on a fully tax equivalent basis, excluding accretion on loans acquired in bank mergers, increased eight basis points in the quarter to 3.70%. This increase was due to higher loan yields partly offset by increased funding costs.
Average interest earning assets decreased $204.6 million mostly due to the decrease in loans held for sale as a result of the national mortgage origination wind down.
Average cost of funds increased five basis points to 0.72% due to higher rates paid on interest bearing liabilities.
 
Operating Segments (compared to 2Q18)
Banking
Operating earnings were $47.4 million, a decrease of $6.2 million, or 11.6%, compared to the prior quarter.
This decrease was due to an increase in provision for credit losses (due to one loan relationship) partly offset by an increase in net interest income (higher average loan yields and lower borrowings) and a decrease in professional and legal fees.
Leasing
Operating earnings were $7.1 million, an increase of $172 thousand, or 2.5%, compared to the prior quarter.
Mortgage Banking
On April 12, 2018, we announced the discontinuation of our national mortgage origination business, which includes substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area.
Operating earnings were $1.1 million compared to an operating loss of $3.4 million in the prior quarter.
The wind down of our national mortgage origination business is proceeding as planned. We project that, excluding any impact of our pending merger with Fifth Third, our remaining mortgage operations will earn quarterly pretax income of approximately $7.4 million in 2019, consistent with prior projections.
Key Items (compared to nine months ended September 30, 2017)
Operating earnings, excluding the Mortgage Banking Segment, increased $15.4 million, or 9.8%, to $172.8 million compared to the nine months ended September 30, 2017.
The growth in operating earnings resulted from the following items (net of tax): a $20.8 million increase in net interest income, a $9.0 million increase in our key fee initiatives revenue (mainly lease financing revenue), a $4.2 million increase in earnings from investments in Small Business Investment Companies, and an approximate $16 million decrease in income tax expense (lower effective tax rate). These items were partly offset by a $20.7 million increase in non-interest expense with more than half of the increase in salaries and benefits (due to annual salary increases, new hires, and higher health insurance costs) and a $13.6 million increase in provision for credit losses (mostly recognized in the third quarter of 2018).
Diluted operating earnings per common share, excluding the Mortgage Banking Segment, were $1.92 compared to $1.79 in the nine months ended September 30, 2017.

Guidance on Selected Financial Items

In light of our pending merger with Fifth Third, we will no longer provide forward-looking financial guidance or update previously provided financial guidance except as otherwise provided in this release with respect to our mortgage operations.

2




Operating Segments

The Company currently has three reportable operating segments: Banking, Leasing, and Mortgage Banking. Our Banking Segment generates revenues primarily from its lending, deposit gathering, and fee business activities. Our Leasing Segment generates revenues through lease originations and related services. As a result of the discontinuation of our national mortgage origination business, we expect to stop operating the mortgage business as a defined segment with separate Mortgage Banking Segment reporting in 2019. The financial information below was adjusted for funds transfer pricing and internal allocations of certain expenses and excludes non-core non-interest income and expense and non-core tax items.

Banking Segment

The following table summarizes certain financial information for the Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Net interest income
$
152,003

 
$
146,614

 
$
140,471

 
$
140,180

 
$
142,888

 
 
$
439,088

 
$
410,319

Provision for credit losses
21,439

 
5,746

 
7,579

 
501

 
3,637

 
 
34,764

 
16,054

Net interest income after provision for credit losses
130,564

 
140,868

 
132,892

 
139,679

 
139,251

 
 
404,324

 
394,265

Non-interest income:
 
 


 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
3,420

 
2,165

 
1,535

 
1,795

 
1,097

 
 
7,120

 
3,968

Treasury management fees
15,226

 
15,066

 
15,156

 
15,234

 
14,508

 
 
45,448

 
43,696

   Wealth management fees
9,089

 
8,969

 
9,121

 
9,024

 
8,702

 
 
27,179

 
25,720

   Card fees
5,362

 
5,654

 
4,787

 
5,032

 
4,585

 
 
15,803

 
13,564

Capital markets and international banking fees
1,913

 
3,785

 
2,998

 
3,999

 
4,870

 
 
8,696

 
11,709

   Other non-interest income
10,987

 
11,838

 
10,675

 
9,359

 
10,940

 
 
33,500

 
29,901

Total non-interest income
45,997

 
47,477

 
44,272

 
44,443

 
44,702

 
 
137,746

 
128,558

Non-interest expense:


 


 


 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
44,933

 
45,103

 
44,821

 
44,782

 
45,096

 
 
134,857

 
131,235

Commissions
1,097

 
941

 
953

 
1,119

 
877

 
 
2,991

 
3,105

Bonus and stock-based compensation
10,774

 
11,533

 
10,610

 
10,418

 
10,032

 
 
32,917

 
31,254

Other salaries and benefits (1)
17,339

 
15,721

 
15,207

 
14,119

 
14,604

 
 
48,267

 
41,007

Total salaries and employee benefits expense
74,143

 
73,298

 
71,591

 
70,438

 
70,609

 
 
219,032

 
206,601

   Occupancy and equipment expense
13,400

 
13,308

 
14,089

 
13,769

 
12,372

 
 
40,797

 
36,787

Computer services and telecommunication expense
8,324

 
9,384

 
9,741

 
9,664

 
8,386

 
 
27,449

 
23,876

   Professional and legal expense
1,347

 
4,846

 
1,359

 
1,967

 
1,239

 
 
7,552

 
4,294

   Other operating expenses
18,479

 
18,665

 
16,745

 
18,817

 
16,757

 
 
53,889

 
53,805

Total non-interest expense
115,693

 
119,501

 
113,525

 
114,655

 
109,363

 
 
348,719

 
325,363

Income before income taxes
60,868

 
68,844

 
63,639

 
69,467

 
74,590

 
 
193,351

 
197,460

Income tax expense
13,468

 
15,237

 
14,539

 
25,734

 
20,064

 
 
43,244

 
56,147

Operating earnings
$
47,400

 
$
53,607

 
$
49,100

 
$
43,733

 
$
54,526

 
 
$
150,107

 
$
141,313

Total assets (period end)
$
16,677,552

 
$
16,581,205

 
$
16,582,585

 
$
16,448,960

 
$
16,406,714

 
 
$
16,677,552

 
$
16,406,714


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

Banking Segment operating earnings for the third quarter of 2018 decreased $6.2 million compared to the prior quarter.

Net interest income increased due to higher average loan yields and reduced borrowings partly offset by a higher cost of funds. Our average yield on loans and cost of funds increased as a result of an increase in short-term rates.

Provision for credit losses increased as a result of higher charge offs during the quarter due to one loan relationship.

Lease financing revenue, net, increased due to higher earnings from investments in leasing companies and residual gains.

Capital markets and international banking fees decreased due to lower swap fees and foreign currency derivative income.

Other non-interest income decreased due to lower earnings from investments in Small Business Investment Companies.

3





Salaries and benefits expense increased as a result of higher health insurance costs due to an increase in claims.

Professional and legal fees decreased as the prior quarter was impacted by higher case settlements and other legal and professional fees.

Banking Segment operating earnings for the nine months ended September 30, 2018 increased $8.8 million, or 6.2%, compared to the same period last year.

Net interest income increased due to higher average loan yields and balances partly offset by higher cost of funds. Our average yield on loans and cost of funds increased as a result of an increase in short-term rates.

Provision for credit losses increased as a result of higher charge offs during the third quarter of 2018 due to one loan relationship.

Non-interest income increased due to higher card fees (increased sales and volume in prepaid cards and higher credit card usage), higher lease financing revenue, net (higher earnings from investments in leasing companies and residual gains), and stronger earnings from Small Business Investment Companies.

Non-interest expense increased as a result of higher salaries and employee benefits expense, occupancy and equipment expense (higher building and software depreciation), computer services and telecommunication expense (previous investments in new technology), and professional and legal fees (case settlements and other legal and professional fees). Salaries and employee benefits expense increased due to annual salary increases, new hires, higher health insurance costs, and higher bonus and stock based compensation expense.

Income tax expense decreased as a result of a decline in the effective tax rate.

4




Leasing Segment

The following table summarizes certain financial information for the Leasing Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Net interest income
$
2,160

 
$
2,349

 
$
2,482

 
$
2,602

 
$
2,686

 
 
$
6,991

 
$
7,300

Provision for credit losses
90

 
500

 
(24
)
 
3,184

 
399

 
 
566

 
674

Net interest income after provision for credit losses
2,070

 
1,849

 
2,506

 
(582
)
 
2,287

 
 
6,425

 
6,626

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Lease financing revenue, net
21,810

 
21,435

 
23,938

 
22,576

 
22,534

 
 
67,183

 
60,261

   Other non-interest income
1,304

 
1,160

 
899

 
1,168

 
26

 
 
3,363

 
1,875

Total non-interest income
23,114

 
22,595

 
24,837

 
23,744

 
22,560

 
 
70,546

 
62,136

Non-interest expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:


 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
5,926

 
6,021

 
5,917

 
5,361

 
5,029

 
 
17,864

 
14,462

Commissions
2,662

 
1,892

 
2,520

 
2,777

 
2,328

 
 
7,074

 
7,015

Bonus and stock-based compensation
1,207

 
1,205

 
974

 
1,761

 
1,228

 
 
3,386

 
3,228

Other salaries and benefits (1)
1,338

 
1,613

 
1,809

 
1,329

 
1,572

 
 
4,760

 
4,676

Total salaries and employee benefits expense
11,133

 
10,731

 
11,220

 
11,228

 
10,157

 
 
33,084

 
29,381

   Occupancy and equipment expense
1,128

 
1,110

 
1,167

 
1,090

 
1,070

 
 
3,405

 
3,025

Computer services and telecommunication expense
474

 
492

 
505

 
595

 
456

 
 
1,471

 
1,345

   Professional and legal expense
353

 
323

 
373

 
457

 
403

 
 
1,049

 
1,194

   Other operating expenses
2,480

 
2,500

 
2,212

 
2,101

 
2,412

 
 
7,192

 
6,766

Total non-interest expense
15,568

 
15,156

 
15,477

 
15,471

 
14,498

 
 
46,201

 
41,711

Income before income taxes
9,616

 
9,288

 
11,866

 
7,691

 
10,349

 
 
30,770

 
27,051

Income tax expense
2,480

 
2,324

 
3,300

 
3,229

 
4,307

 
 
8,104

 
10,951

Operating earnings
$
7,136

 
$
6,964

 
$
8,566

 
$
4,462

 
$
6,042

 
 
$
22,666

 
$
16,100

Total assets (period end)
$
1,340,901

 
$
1,354,940

 
$
1,360,117

 
$
1,403,690

 
$
1,307,459

 
 
$
1,340,901

 
$
1,307,459


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.

Leasing Segment operating earnings for the third quarter of 2018 increased $172 thousand compared to the prior quarter.

Lease financing revenue, net, increased slightly due to higher fees from sales of third-party equipment maintenance contracts, promotional income, and syndication fees partly offset by lower residual gains.

Non-interest expense increased slightly due to an increase in commissions expense resulting from increased sales of third-party equipment maintenance contracts in the quarter.

Leasing Segment operating earnings for the nine months ended September 30, 2018 increased $6.6 million, or 40.8%, compared to the same period last year due largely to an increase in lease financing revenue as a result of higher residual gains, promotional income, and syndication fees partly offset by higher salaries (a result of the investment in sales and other revenue generating staff). Additionally, income tax expense declined as a result of a decrease in the effective tax rate.

5




Mortgage Banking Segment

The following table summarizes certain financial information for the Mortgage Banking Segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Net interest income
$
7,685

 
$
10,106

 
$
10,428

 
$
10,611

 
$
11,373

 
 
$
28,219

 
$
31,365

Provision for credit losses
(26
)
 
(27
)
 
(47
)
 
(42
)
 
481

 
 
(100
)
 
1,222

Net interest income after provision for credit losses
7,711

 
10,133

 
10,475

 
10,653

 
10,892

 
 
28,319

 
30,143

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Mortgage origination revenue
1,907

 
13,334

 
17,854

 
18,146

 
22,647

 
 
33,095

 
68,725

   Mortgage servicing revenue
8,009

 
5,592

 
7,193

 
4,228

 
5,595

 
 
20,794

 
18,125

   Other non-interest income
13

 
11

 
1

 

 
1

 
 
25

 
1

Total non-interest income
9,929

 
18,937

 
25,048

 
22,374

 
28,243

 
 
53,914

 
86,851

Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries
5,375

 
12,033

 
13,849

 
12,322

 
11,867

 
 
31,257

 
34,995

Commissions
1,189

 
4,790

 
3,962

 
4,407

 
6,001

 
 
9,941

 
17,427

Bonus and stock-based compensation
392

 
115

 
471

 
1,153

 
651

 
 
978

 
2,272

Other salaries and benefits (1)
2,149

 
4,539

 
4,924

 
4,705

 
4,746

 
 
11,612

 
14,676

Total salaries and employee benefits expense
9,105

 
21,477

 
23,206

 
22,587

 
23,265

 
 
53,788

 
69,370

   Occupancy and equipment expense
1,273

 
2,032

 
2,138

 
1,868

 
1,940

 
 
5,443

 
5,888

Computer services and telecommunication expense
1,263

 
1,677

 
1,673

 
1,779

 
1,734

 
 
4,613

 
5,098

   Professional and legal expense
174

 
266

 
162

 
490

 
467

 
 
602

 
1,662

   Other operating expenses
4,368

 
8,159

 
8,749

 
7,673

 
8,043

 
 
21,276

 
24,497

Total non-interest expense
16,183

 
33,611

 
35,928

 
34,397

 
35,449

 
 
85,722

 
106,515

Income (loss) before income taxes
1,457

 
(4,541
)
 
(405
)
 
(1,370
)
 
3,686

 
 
(3,489
)
 
10,479

Income tax expense (benefit)
390

 
(1,182
)
 
(110
)
 
(555
)
 
1,469

 
 
(902
)
 
4,170

Operating earnings (loss)
$
1,067

 
$
(3,359
)
 
$
(295
)
 
$
(815
)
 
$
2,217

 
 
$
(2,587
)
 
$
6,309

Total assets (period end) (2)
$
1,701,518

 
$
2,030,412

 
$
2,224,821

 
$
2,234,290

 
$
2,402,362

 
 
$
1,701,518

 
$
2,402,362


(1) 
Includes health insurance, payroll taxes, 401(k) and profit sharing contributions, overtime, and temporary help expenses.
(2) 
The decrease in total assets from June 30, 2018 to September 30, 2018 was due to the decrease in loans held for sale as a result of the wind down of the national mortgage origination business.

On April 12, 2018, the Company announced that it will be discontinuing its national mortgage origination business, which includes substantially all originations outside of the Company's consumer banking footprint in the Chicagoland area.

As expected with the wind down, total non-interest income declined faster than expenses. The first phase of staff reductions was completed in early July 2018, and staff reductions continued through the rest of the third quarter of 2018. The wind down is expected to be completed in the first quarter of 2019. We project that, excluding any impact of the pending Fifth Third merger, remaining operations will earn quarterly pre-tax income of approximately $7.4 million, consistent with prior projections. We also continue to expect one-time exit expenses to range from $37 to $41 million, with approximately $29 million already recognized in the nine months ended September 30, 2018.


6




Additional Mortgage Banking Segment Data

The following table presents additional information regarding the Mortgage Banking Segment (dollars in thousands):

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Mortgage origination revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale revenue, net
 
$
1,303

 
$
9,756

 
$
11,652

 
$
13,376

 
$
17,098

 
 
$
22,711

 
$
50,705

Origination fees (1)
 
604

 
3,578

 
6,202

 
4,770

 
5,549

 
 
10,384

 
18,020

Total mortgage origination revenue
 
$
1,907

 
$
13,334

 
$
17,854

 
$
18,146

 
$
22,647

 
 
$
33,095

 
$
68,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing fees
 
$
15,953

 
$
15,707

 
$
16,068

 
$
14,802

 
$
14,531

 
 
$
47,728

 
$
42,331

Amortization/prepayment of mortgage servicing rights (2)
 
(8,418
)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
(8,399
)
 
 
(25,327
)
 
(22,964
)
Fair value changes of mortgage servicing rights
 
2,521

 
1,193

 
10,890

 
7,231

 
4,475

 
 
14,604

 
2,363

Economic hedge activity, net
 
(2,047
)
 
(2,414
)
 
(11,750
)
 
(8,768
)
 
(5,012
)
 
 
(16,211
)
 
(3,605
)
Fair value changes of mortgage servicing rights net of economic hedge activity (3)
 
474

 
(1,221
)
 
(860
)
 
(1,537
)
 
(537
)
 
 
(1,607
)
 
(1,242
)
Total mortgage servicing revenue
 
$
8,009

 
$
5,592

 
$
7,193

 
$
4,228

 
$
5,595

 
 
$
20,794

 
$
18,125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing rights, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
296,629

 
$
291,561

 
$
276,279

 
$
261,446

 
$
249,688

 
 
$
276,279

 
$
238,011

Originations/purchases
 
5,071

 
12,769

 
12,407

 
16,639

 
15,682

 
 
30,247

 
44,036

Amortization/prepayment (2)
 
(8,418
)
 
(8,894
)
 
(8,015
)
 
(9,037
)
 
(8,399
)
 
 
(25,327
)
 
(22,964
)
Fair value changes
 
2,521

 
1,193

 
10,890

 
7,231

 
4,475

 
 
14,604

 
2,363

Ending balance
 
$
295,803

 
$
296,629

 
$
291,561

 
$
276,279

 
$
261,446

 
 
$
295,803

 
$
261,446

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage servicing book (unpaid principal balance of loans serviced for others)
 
$
22,382,822

 
$
22,643,179

 
$
22,362,896

 
$
21,993,128

 
$
21,380,397

 
 
$
22,382,822

 
$
21,380,397

Mortgage servicing rights valuation
 
1.32
%
 
1.31
%
 
1.30
%
 
1.26
%
 
1.22
%
 
 
1.32
%
 
1.22
%

(1) 
2017 amounts were revised as certain costs to originate mortgage loans were reclassified from mortgage origination revenue to other operating expenses.
(2) 
Changes due to collection or realization of expected cash flows.
(3) 
Approximately $500 thousand of the second quarter 2018 fair value change was due to an increase in delinquencies in the quarter resulting in higher anticipated collection costs and lower mortgage servicing rights asset value. In addition, approximately $300 thousand of the fair value change was due to higher than expected prepayments of mortgage servicing rights in the second quarter of 2018. Approximately $800 thousand of the fourth quarter 2017 fair value change was due to an increase in delinquencies in the quarter.

7




FORWARD-LOOKING STATEMENTS

When used in this document and in reports filed with or furnished to the Securities and Exchange Commission (the "SEC"), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “guidance,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) the possibility that our actual results on selected items relating to our mortgage operations for which we have provided projections or estimates in this document will be materially different from such projections or estimates; (2) the ability to satisfy closing conditions to our pending merger with Fifth Third on the expected terms and schedule; (3) the ability to obtain regulatory approvals required to complete our pending merger with Fifth Third, and the timing and conditions for such approvals; (4) delays in closing our pending merger with Fifth Third; (5) disruptions to our business resulting from our pending merger with Fifth Third; (6) the risk that funds obtained from capital raising activities will not be utilized efficiently or effectively; (7) expected revenues, cost savings, synergies, and other benefits from our other merger and acquisition activities might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (8) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses, which could necessitate additional provisions for loan losses, resulting both from originated loans and loans acquired from other financial institutions; (9) the quality and composition of our securities portfolio; (10) competitive pressures among depository institutions; (11) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (12) the possibility that our mortgage banking business may experience increased volatility in its revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced, both before and after the discontinuation of our national mortgage origination business, if we are unable to originate and sell mortgage loans at profitable margins or if changes in interest rates negatively impact the value of our mortgage servicing rights; (13) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (14) fluctuations in real estate values; (15) results of examinations of us and our bank subsidiary by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, increase our allowance for loan and lease losses, write-down asset values or increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (16) our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place; (17) the possibility that security measures implemented might not be sufficient to mitigate the risk of a cyber attack or cyber theft, and that such security measures might not protect against systems failures or interruptions; (18) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (19) our ability to access cost-effective funding; (20) changes in financial markets; (21) changes in economic conditions in general and in the Chicago metropolitan area in particular; (22) the costs, effects, and outcomes of litigation; (23) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act, changes in the interpretation and/or application of laws and regulations by regulatory authorities, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws, including but not limited to the TCJ Act, or interpretations thereof by taxing authorities; (24) changes in accounting principles, policies or guidelines; and (25) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.





TABLES TO FOLLOW

8




CONSOLIDATED BALANCE SHEETS (Unaudited)

 (Dollars in thousands)
 
9/30/2018
 
6/30/2018
 
3/31/2018
 
12/31/2017
 
9/30/2017
ASSETS
 
 

 
 

 
 

 
 

 
 

Cash and due from banks
 
$
342,933

 
$
373,448

 
$
332,234

 
$
397,880

 
$
361,080

Interest earning deposits with banks
 
87,740

 
119,672

 
50,624

 
181,341

 
82,636

Total cash and cash equivalents
 
430,673

 
493,120

 
382,858

 
579,221

 
443,716

Investment securities:
 
 
 
 
 
 
 
 
 
 
Securities available for sale, at fair value
 
1,710,636

 
1,647,260

 
1,679,011

 
1,408,326

 
1,497,543

Securities held to maturity, at amortized cost
 
923,082

 
923,036

 
933,319

 
959,082

 
994,238

Marketable equity securities, at fair value
 
10,901

 
10,922

 
11,124

 

 

Non-marketable securities - FHLB and FRB Stock
 
107,407

 
115,453

 
118,955

 
114,111

 
152,345

Total investment securities
 
2,752,026

 
2,696,671

 
2,742,409

 
2,481,519

 
2,644,126

Loans held for sale
 
51,834

 
423,367

 
561,549

 
548,578

 
722,754

Loans:
 
 
 
 
 
 
 
 
 
 
Total loans, excluding purchased credit-impaired loans
 
13,843,880

 
13,719,244

 
13,824,990

 
13,846,318

 
13,753,459

Purchased credit-impaired loans
 
91,072

 
101,001

 
109,990

 
119,744

 
131,919

Total loans
 
13,934,952

 
13,820,245

 
13,934,980

 
13,966,062

 
13,885,378

Less: Allowance for loan and lease losses
 
155,411

 
162,790

 
161,712

 
157,710

 
159,128

Net loans
 
13,779,541

 
13,657,455

 
13,773,268

 
13,808,352

 
13,726,250

Lease investments, net
 
429,843

 
433,505

 
408,798

 
409,051

 
371,541

Premises and equipment, net
 
274,006

 
281,458

 
281,791

 
286,690

 
286,482

Cash surrender value of life insurance
 
207,280

 
205,982

 
204,710

 
203,602

 
204,855

Goodwill
 
999,925

 
999,925

 
1,003,548

 
1,003,548

 
999,925

Other intangibles
 
49,114

 
50,968

 
52,864

 
54,766

 
56,745

Mortgage servicing rights, at fair value
 
295,803

 
296,629

 
291,561

 
276,279

 
261,446

Other real estate owned, net
 
10,933

 
10,869

 
10,528

 
9,736

 
13,020

Other real estate owned related to FDIC transactions
 
2,661

 
2,908

 
4,185

 
4,788

 
4,817

Other assets
 
436,332

 
413,700

 
449,454

 
420,810

 
380,858

Total assets
 
$
19,719,971

 
$
19,966,557

 
$
20,167,523

 
$
20,086,940

 
$
20,116,535

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

 
 

 
 

 
 

Liabilities
 
 

 
 

 
 

 
 

 
 

Deposits:
 
 

 
 

 
 

 
 

 
 

Non-interest bearing
 
$
6,036,012

 
$
6,347,208

 
$
6,385,149

 
$
6,381,512

 
$
6,101,159

Interest bearing
 
8,672,781

 
8,575,455

 
8,585,444

 
8,576,866

 
8,313,985

Total deposits
 
14,708,793

 
14,922,663

 
14,970,593

 
14,958,378

 
14,415,144

Short-term borrowings
 
903,355

 
651,462

 
717,679

 
861,039

 
1,865,415

Long-term borrowings
 
451,677

 
730,292

 
851,221

 
505,158

 
405,715

Junior subordinated notes issued to capital trusts
 
133,995

 
194,450

 
194,304

 
211,494

 
211,289

Accrued expenses and other liabilities
 
556,822

 
518,997

 
499,379

 
541,048

 
526,880

Total liabilities
 
16,754,642

 
17,017,864

 
17,233,176

 
17,077,117

 
17,424,443

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
194,719

 
194,719

 
194,719

 
309,999

 
115,280

Common stock
 
862

 
861

 
860

 
858

 
858

Additional paid-in capital
 
1,703,404

 
1,698,057

 
1,692,650

 
1,691,007

 
1,685,971

Retained earnings
 
1,147,060

 
1,127,814

 
1,112,323

 
1,065,303

 
940,948

Accumulated other comprehensive (loss) income
 
(17,186
)
 
(9,818
)
 
(3,719
)
 
3,584

 
9,772

Treasury stock
 
(63,530
)
 
(62,940
)
 
(62,486
)
 
(60,928
)
 
(60,737
)
Total stockholders' equity
 
2,965,329

 
2,948,693

 
2,934,347

 
3,009,823

 
2,692,092

Total liabilities and stockholders' equity
 
$
19,719,971

 
$
19,966,557

 
$
20,167,523

 
$
20,086,940

 
$
20,116,535



9




CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
(Dollars in thousands, except per share data)
 
3Q18
 
2Q18
 
1Q18
 
4Q17
 
3Q17
 
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
$
168,190

 
$
164,401

 
$
157,119

 
$
154,631

 
$
155,440

 
 
$
489,710

 
$
432,603

   Nontaxable
 
2,146

 
2,330

 
2,271

 
2,362

 
2,632

 
 
6,747

 
8,303

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Taxable
 
10,366

 
10,578

 
7,934

 
7,696

 
8,440

 
 
28,878

 
26,279

   Nontaxable
 
9,387

 
9,439

 
9,476

 
9,677

 
9,731

 
 
28,302

 
29,541

Other interest earning accounts and Federal funds sold
 
1,650

 
244

 
131

 
600

 
327

 
 
2,025

 
754

Total interest income
 
191,739

 
186,992

 
176,931

 
174,966

 
176,570

 
 
555,662

 
497,480

Interest expense:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
   Deposits
 
20,485

 
17,386

 
15,032

 
13,552

 
10,865

 
 
52,903

 
27,133

   Short-term borrowings
 
2,317

 
2,769

 
2,516

 
3,257

 
5,148

 
 
7,602

 
11,440

   Long-term borrowings and junior subordinated notes
 
7,089

 
7,768

 
6,002

 
4,764

 
3,610

 
 
20,859

 
9,923

Total interest expense
 
29,891

 
27,923

 
23,550

 
21,573

 
19,623

 
 
81,364

 
48,496

Net interest income
 
161,848

 
159,069

 
153,381

 
153,393

 
156,947

 
 
474,298

 
448,984

Provision for credit losses
 
21,503

 
6,219

 
7,508

 
3,643

 
4,517

 
 
35,230

 
17,950

Net interest income after provision for credit losses
 
140,345

 
152,850

 
145,873

 
149,750

 
152,430

 
 
439,068

 
431,034

Non-interest income:
 


 
 
 
 

 
 

 
 

 
 
 

 
 

Mortgage banking revenue
 
9,916

 
18,926

 
25,047

 
22,374

 
28,242

 
 
53,889

 
86,850

Lease financing revenue, net
 
25,205

 
22,918

 
24,710

 
23,620

 
23,148

 
 
72,833

 
62,967

Treasury management fees
 
15,226

 
15,066

 
15,156

 
15,234

 
14,508

 
 
45,448

 
43,696

Wealth management fees
 
9,089

 
8,969

 
9,121

 
9,024

 
8,702

 
 
27,179

 
25,720

Card fees
 
5,362

 
5,654

 
4,787

 
5,032

 
4,585

 
 
15,803

 
13,564

Capital markets and international banking fees
 
1,913

 
3,785

 
2,998

 
3,999

 
4,870

 
 
8,696

 
11,709

Consumer and other deposit service fees
 
3,051

 
2,929

 
2,912

 
3,261

 
3,424

 
 
8,892

 
10,072

Brokerage fees
 
1,138

 
1,050

 
864

 
942

 
1,004

 
 
3,052

 
3,379

Loan service fees
 
2,103

 
2,148

 
2,245

 
2,197

 
2,114

 
 
6,496

 
6,120

Increase in cash surrender value of life insurance
 
1,298

 
1,272

 
1,108

 
1,511

 
1,321

 
 
3,678

 
3,910

Net (loss) gain on investment securities
 
(85
)
 
(86
)
 
(174
)
 
111

 
83

 
 
(345
)
 
451

Net loss on disposal of other assets
 
(32
)
 
(397
)
 
(357
)
 
(2,016
)
 
(180
)
 
 
(786
)
 
(307
)
Other operating income
 
5,657

 
6,072

 
4,385

 
4,534

 
4,110

 
 
16,114

 
11,420

Total non-interest income
 
79,841

 
88,306

 
92,802

 
89,823

 
95,931

 
 
260,949

 
279,551

Non-interest expense:
 
 
 
 
 
 

 
 

 
 

 
 
 

 
 

Salaries and employee benefits expense
 
101,885

 
123,478

 
106,514

 
109,247

 
105,815

 
 
331,877

 
309,932

Occupancy and equipment expense
 
16,117

 
16,451

 
17,429

 
16,846

 
15,382

 
 
49,997

 
45,710

Computer services and telecommunication expense
 
12,684

 
10,871

 
11,156

 
11,304

 
10,062

 
 
34,711

 
29,287

Advertising and marketing expense
 
3,432

 
3,342

 
3,863
<